We recently compiled a list of the 7 Undervalued Canadian Stocks To Buy According To Hedge Funds. In this article, we are going to take a look at where Canadian Natural Resources (NYSE:CNQ) stands against the other undervalued Canadian stocks.
Canada’s Economic Outlook
According to the report Economic Outlook Canada Q4 2024, released by S&P Global on September 24, Canada’s economy shows signs of improvement, with growth expected to gain momentum in the coming years. S&P Global forecasts a 1.2% GDP growth in 2024 and a 2.0% growth in 2025, which still falls short of the country’s potential growth rate of 1.8%. However, a recovery in 2025 is expected to be driven by fixed investment, particularly residential and non-residential, rather than consumer spending. Consumer spending will remain subdued due to the cumulative effect of higher interest rates. Changes to immigration policies and their effectiveness are key uncertainties in the forecast.
The labor market in Canada is softening, with weaker hiring and rising unemployment. Wage growth is outpacing productivity growth, which is inconsistent with 2% inflation. The unemployment rate is expected to rise to 7% by the end of 2024 before falling in 2025. Despite this, the Bank of Canada (BoC) is shifting its focus to downside risks to the economic growth outlook. The BoC has already cut interest rates for the third consecutive time and is expected to continue making 25 basis point cuts in the fourth quarter and January.
Canada: A Prime Destination for Foreign Direct Investment
Canada is one of the world’s top destinations for foreign direct investment. Warren Buffett expressed a positive view of investing in Canada, stating that Berkshire Hathaway has a significant presence in the country with many operations and investments across various entities. He feels comfortable investing in Canada, just like in the US, as he understands the business environment and economy. Buffett noted that Canada’s economy moves closely with the US, and the results from his company’s businesses with Canadian operations are consistent with those in the US. He is open to investing in Canada, citing a past example where his company invested in a Canadian financial institution. Buffett stated that his company has no “mental blocks” about investing in Canada and views the country as a “terrific” place to operate. He also mentioned that Canada is a major economy that his company feels confident about operating in and that they are currently looking at a potential investment opportunity in the country.
Investing in Canada, particularly in the Atlantic region, presents a unique opportunity to capitalize on the growing demand for green hydrogen and its applications. Green hydrogen production can be leveraged to create new industries, such as ammonia and fertilizer production, as well as green steel, which can be produced using the region’s abundant natural resources and innovative technologies.
Canada’s economy is showing signs of improvement, with growth expected to gain momentum in the coming years. The Bank of Canada’s monetary policy adjustments and the recovery in fixed investment are expected to drive growth in 2025. With that in context, let’s take a look at the 7 undervalued Canadian stocks to buy according to hedge funds.
Our Methodology
To compile our list of 7 undervalued Canadian stocks to buy according to hedge funds, we used the Finviz and Yahoo stock screeners to find the largest Canadian companies. From that list, we screened for companies that are trading at a forward P/E ratio of under 15, as of September 25. We then narrowed our choices to 7 stocks according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of their hedge fund sentiment, as of the second quarter.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A vast oil rig pumping crude oil during a sunset, emphasizing the company’s focus on oil & gas exploration and production.
Canadian Natural Resources (NYSE:CNQ)
Number of Hedge Fund Investors: 46
Forward P/E Ratio as of September 25: 12.77
Canadian Natural Resources (NYSE:CNQ) is one of Canada’s largest independent oil and gas producers. The company explores, develops, and produces crude oil and natural gas in Western Canada, the United Kingdom, the North Sea, offshore Africa, and other international locations.
Canadian Natural Resources (NYSE:CNQ) total production has been steady at around 1.3 million barrels per day for the past few years. Management is waiting for more favorable market conditions as natural gas prices improve. Canadian Natural Resources (NYSE:CNQ) is expected to increase production, which will drive up revenue and gross profit. The company’s unit economics, as measured by netback analysis, have already shown a steady recovery, increasing from $20.64/bbl to $28.68/bbl in Q2 compared to the same quarter in the previous year. This trend is expected to continue, with netbacks potentially reaching $30-35/bbl levels, driven by operational improvements and higher natural gas prices.
The US Energy Information Administration’s (EIA) short-term energy outlook forecast suggests that natural gas prices are expected to increase over the next year, driven by increased liquefied natural gas (LNG) exports. This positive trend is expected to benefit Canadian Natural Resources (NYSE:CNQ), which has intentionally held back on natural gas production, with approximately 20% of its remaining 2024 planned natural gas wells drilled but production curtailed, Canadian Natural Resources (NYSE:CNQ) is well-positioned to capitalize on the expected price increase.
Canadian Natural Resources’ (NYSE:CNQ) stock is trading at a forward PE of 12.77. Industry analysts have a consensus on the stock’s Buy rating, setting an average share price target at $40.64, which represents a 16% upside potential from its current levels. As of the second quarter, the company’s stock is held by 46 hedge funds with a stakes worth $3.77 billion. Fisher Asset Management is the largest shareholder in the company and owns stocks worth $1.49 billion as of June 30.
Overall CNQ ranks 1st on our list of the undervalued Canadian stocks to buy. While we acknowledge the potential of CNQ as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CNQ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.